Takaful by Capt. M. Jamil Akhtar
Hailey Collage o f Banking & Finance
Punjab University- Lahore.
13th August, 07
Takaful
An emerging niche market
By:
Capt. M. Jamil Akhtar Khan
ACII, MCIT, Master Mariner
Chief Executive Officer
TAKAFUL PAKISTAN LIMITED
Outline of Presentation
Introduction to Takaful
Objections to Conventional Insurance
Difference b/w Conventional Insurance & Takaful
Takaful Through Time
Takaful Models
Takaful Types
BancaTakaful
ReTakaful
Foundations of Takaful in Pakistan
Takaful Prospects in Pakistan
Challenges to Takaful
Introduction to TAKAFUL PAKISTAN LIMITED
Introduction to
Takaful
Meaning of Takaful
Takaful comes from the Arabic root-word
‘kafala’ — guarantee.
Takaful means mutual protection and joint
guarantee.
Operationally, takaful refers to participants
mutually contributing to a common fund with
the purpose of having mutual indemnity in
the case of peril or loss.
Reference — Al Quran:
“Help (ta’awan) one another in furthering
virtue (birr) and Allah consciousness
(taqwa) and do not help one another in
furthering evil and enmity”. Al Maidah:
verse 2 (5:2).
Takaful is a form of mutual help (ta’awun)
in furthering good/virtue by helping others
who are in need / in hardship .
Reference – Hadith:
“tie the camel first, then submit
(tawakkal) to the will of Allah”
The hadith implied a strategy to
mitigate/reduce risk.
Takaful provides a strategy of risk
mitigation/reduction by virtue of
collective risk taking that distributes risks
and losses to a large number of
participants. This mitigates the otherwise
very damaging losses, if borne
individually.
Declaration by Shariah scholars
rendering conventional insurance un-
Islamic
Fatwa issued in Judicial Conference held in
Makkah in Shaban 1398 AH.
Verdict of Supreme Court of Egypt on Dec.
27, 1926.
Unanimous resolutions and fatwa by Ulama
in the Muslim League Conference in Cairo
in 1965.
Unanimous decision by Muslim Scholars in
seminar held in Morocco on May 6, 1972.
Judicial Opinions and Fatwas
confirming validity of Takaful
Fatwa issued by Higher Council of Saudi
Arabia in 1397 A.H.
Fatwa Issued by the Fiqh Council of Muslim
World League in 1398 A.H.
Fatwa issued by the Fiqh Council of the OIC
in 1405 A.H. (1985).
Fiqh Academy Resolution 1985
• Islamic Fiqh (science of Shariah) Academy, emanating
from the Organization of Islamic Conference, meeting in
its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul-
Thani, 1405 A.H. (Dec 1985) issued a Resolution which in
summary stated the following:
• The commercial Insurance contract… is prohibited
(Haraam) according to the Shariah.
• The alternative Takaful contract which conforms to the
principles of Islamic dealings is Halaal, being the contract
of cooperative insurance, which is founded on the basis of
charitable donation and Shariah compliant dealings.
Basic Elements of Takaful
Mutuality and cooperation.
Takaful contract pertains to Tabarru’at as against
mu’awadat in case of conventional insurance.
Payments made with the intention of Tabarru
(contribution)
Eliminates the elements of Gharrar, Maisir and
Riba.
Wakalah/Modarabah basis of operations.
Joint Guarantee / Indemnity amongst participants
– shared responsibility.
Constitution of separate “Participants’ Takaful
Fund”.
Constitution of “Shariah Supervisory Board.”
Investments as per Shariah.
Main drivers of Takaful
Piety (individual purification)
Brotherhood (mutual assistance)
Charity (Tabarru or contribution)
Mutual Guarantee
Community well-being as opposed to profit
maximization.
Objections to
Conventional
Insurance
Insurance Defined
Definition of an Insurance Contract
“An agreement whereby one party, the insurer, in
return for a consideration, the premium, undertakes
to pay to the other party, the insured, a sum of
money or its equivalent in kind on the happening of
a specified event, which is contrary to the insured’s
financial interest”
Subject-matter of an Insurance Contract
“… what is it that is insured in a fire policy? Not the
bricks and materials used in building the house, but
the financial interest (i.e. money) of the insured in
the subject-matter of insurance …”
(Lord Justice Brett in Castellian v. Preston – 1883)
Objections to Conventional
Insurance
Scholars view the insurance contract as an
exchange contract – money is being exchanged for
money over time.
This brings about the problem of gharrar (which
leads to maisir) and in investments aspect, riba.
Elements of:
• Uncertainty – Gharrar
• Gambling – Maisir
• Interest – Riba
• UW + Investment Profit belongs to the
Company
Note that the Scholars do not object to insurance
per se but only to certain weaknesses in the
insurance contract.
Uncertainty – Gharrar
Conventional insurance contract is basically a
contract of exchange (mu’awadat) i.e. buying and
selling whereby policy (indemnity) is sold as goods,
with the premium as the price or consideration.
The consideration must be certain for exchange
contract.
Gharrar in insurance contracts pertains to
“deliverability” of subject matter, i.e. uncertainty as
to:
Whether the insured will get the compensation
promised?
How much the insured will get?
When will the compensation be paid?
Thus, it involves an element of uncertainty in the
subject matter of the insurance sales contract, which
renders it void under the Islamic law.
Gambling – Maisir
“Insurance is a contract upon speculation. Good
faith forbids either party from concealing what he
privately knows, to draw the other into a bargain,
from his ignorance of that fact, and his believing to
the contrary” (Lord Mansfield in Carter v. Boehm
– 1766).
The insured loses the money paid for the premium
when the insured event does not occur.
The company will be in deficit if claims are higher
than premium.
Interest – Riba
“ …. Allah has permitted trading and
forbidden riba” (Al Baqarah 2 : 275).
Insurance funds are invested in financial
instruments which contain the element of
Riba.
Comparing Takaful to Conventional Insurance
Issue Conventional Insurance Takaful
Organization Principle Profit for shareholders Mutual for participants
Basis Risk Transfer Co-operative risk sharing
Value Proposition Profits maximization Affordability and spiritual
satisfaction
Laws Secular/Regulations Sharia plus regulations
Ownership Shareholders Participants
Management status Company Management Operator
Form of Contract Contract of Sale Cooperative,
Islamic contracts of Wakala or
Mudarbah with Tabar’ru
(contributions)
Investments Interest based Sharia compliant, Riba-free
Surplus Shareholders’ account Participants’ account
Takaful Through Time
Takaful through Time
Origins in the First Constitution of Madina.
It evolved and continued in one form or the other
throughout the Abbaside period and even later during the
Ottoman empire.
Serious efforts were made in modern times, in 1970s to
come up with an Islamic alternative to the conventional
insurance.
The first Takaful company was set up in Sudan in 1979,
almost simultaneously followed by another one set up in
Bahrain.
Takaful through Time… (Cont’d.)
There are now 85+ Takaful companies in over 25
countries.
The total insurance premium of OIC countries for 2004
was USD 50 Billion; of this, Takaful contribution
accounts for 5% (i.e. USD 2.5 Billion). This is expected to
increase to USD 15 Billion by 2015.
Poor Insurance penetration in the Muslim countries (<1%
of GDP).
Average growth rate higher than conventional insurance
companies (around 25%).
Non–Muslims increasingly opting for Takaful products for
commercial benefits.
Takaful Models
Mudaraba Model
The surplus is shared between the
participants with a takaful operator. The
sharing of such profit (surplus) may be in a
ratio 5:5 , 6:4 etc. as mutually agreed
between the contracting parties. Generally,
these risk sharing arrangements allow the
takaful operator to share in the underwriting
results from operations as well as the
favourable performance returns on invested
premiums.
Profits
attributable
Mudaraba Model to
Shareholders
Company’s
Admin. &
Company Mangt.
Expenses
Investment Profit
By From
Company Investments
Company’s
Share from
Surplus
Takaful
General General Operational
Contribution Surplus
Participant Takaful Takaful Cost of
paid by Takaful
(Profit)
Fund Fund
Participant
Participant’s
Share
from Surplus
Wakala Model
Cooperative risk sharing occurs among
participants where a takaful operator earns a
fee for services (as a Wakeel or Agent) and
does not participate or share in any
underwriting results as these belong to
participants as surplus or deficit. Under the
Al- Wakala model, the operator may also
charge a fund management fee and
performance incentive fee.
Wakala Model
Mudarib's’
Wakala Profit Share Management Profit/Loss
Company Fee From of PTF’s
Expense attributable to
Investments Investment
(Capital) (30% to 35%) of the Company Shareholders
Income
Takaful
Contribution Investment by Investment Income Sharing
paid the Company on Mudaraba Basis
by Participant
General Operational Surplus
Participants’ Investment Cost of Surplus Distribution
Takaful Income Takaful/
Reserves
(Profit) to
Takaful Fund Fund ReTakaful Participants
Wakala -Waqf Model
It is a WAKALAH model with a separate legal entity of WAQF in-
between.
The relationship of the participants and the operator is directly
with the WAQF fund. The operator is the ‘Wakeel’ of the fund
and the participants pay contribution to the WAQF fund by way
of Tabarru.
The contributions received would also be a part of this fund
and the combined amount will be used for investment and the
profits earned would again be deposited into the same fund
which also eliminates the issue of Gharar.
Losses to the participant are paid by the company from the
same fund.
Operational expenses that are incurred for providing Takaful
services are also met from the same fund.
Wakala-Waqf Model
Share SHARE H O L D E R S’ F U N D (S.H.F.)
Holder
Mudarib’s Management
Wakalah Investmen Share of PTF’s Expense of Profit/Loss
Fee t Investment the
Income Income Company
Takaful
Operator
Investment by
the Company
WAQF Operational Claims &
Cost of Takaful Investment Reserves Surplus
/ ReTakaful Income (Balance)
P A R T I C I P A N T S’ T A K A F U L F U N D
(P.T.F.)
Participant
Models – The beauty of Islam lies
in its
plurality … !
ISLAM
AQIDAH SHARIAH AKHLAQ
Faith & Belief Practices & Activities Moralities & Ethics
IBADAH MUAMALAT
Man-to-God Worship Man-to-Man Activities
Political Economic Social
Activities Activities Activities
Risk Management
Takaful
General Takaful Types
General Takaful – offers all kinds of non-
life risk coverage. It is normally divided into
following classes:
Property Takaful
Marine Takaful
Motor Takaful
Miscellaneous Takaful
Types of Family Takaful
Term Life Takaful
Whole Life Takaful
Endowment Takaful
Universal Takaful
Marriage Plan
Education Plan
Takaful Policy Document /
Participants’ Membership Document
Preamble:
This is to acknowledge that the applicant (hereinafter called the
'Participant'), as more fully described in the schedule hereto:
i. Is accepted as a member of the Participants' Takaful Fund
(hereinafter called the 'Fund') operated by Takaful Pakistan Limited
(hereinafter called the 'Company').
ii. Being a member of the Fund, he/she is acknowledged as a
beneficiary under the attached Indemnity Policy of the Fund, and of the
benefits declared by the Fund from time to time under this policy, in
accordance with the Waqf rules governing the Fund.
iii. Subject to the participant continuing as a member of the Fund
and complying with his/her undertaking under his/her declaration
made in the proposal form, he/she is indemnified by the Fund as one of
its beneficiaries against the perils/events described, in the manner and
to the extent as stated hereunder.
Takaful Policy Document /
Participants’ Membership Document
Duration:
Normally policies are issued for the duration of
twelve months.
Extended coverage on project policies.
MARINE POLICY : The membership under this
document shall be for the period of _________
months. However, the benefits under this
document, except Surplus if any, shall cease on the
arrival of goods at destination.
Takaful Policy Document /
Participants’ Membership Document
Cancellation Clause:
This Policy may at any time be terminated at the
option of the Company, on 14 days' notice to that
effect being given to the Participant at his last known
address. In that case, the Participant shall be GIVEN
an amount equivalent to a ratable proportion of the
contribution for the unexpired Period of Policy from
the date of such cancellation. This Policy my also be
terminated at any time at the request of the
Participant, in which case the Participant will be
PAID an amount equivalent to the actual contribution
made initially by him/her, less the amount worked as
per the following scale applicable to the period during
which the policy has been in force:
Takaful Policy Document /
Participants’ Membership Document
TAKAFUL OPERATOR'S FEE
The Company shall deduct Takaful Operator's fee out
of the Contribution received under this Policy. Such
fee shall be based on the Wakala principle since the
Company hereby acts as a Wakeel on behalf of the
Fund.
INVESTMENT MANAGEMENT SHARE
The Company shall act as a Mudarib for the purpose
of managing the investment of the Participant's
Contribution. As such, the Company stands entitled to
a share in the investment income thereof as Mudarib.
Takaful Policy Document /
Participants’ Membership Document
SURPLUS DISTRIBUTION
If, at the end of the period of Policy stated in
the Schedule, there is a surplus in the General
Takaful Fund, the same shall be distributed
among the Participants. Provided that, in case
the Participant has made any claim or
received any benefits under this Policy, that
claimed amount shall be deducted from the
net amount worked out as due to the
Participant.
BANCATAKAFUL
Background
Range of Products
Savings → Personal Accident,
Homeowners’ Comprehensive, Credit
Cards, etc.
Financing, Individuals → Car Ijarah,
Housing Musharika, Mortgage Takaful.
Financing, SMEs → Trade Credit Takaful,
Business, Office, Equipment, Assets.
E-Commerce
BANCATAKAFUL (…Cont’d.)
Advantages of BancaTakaful:
Facilitation Desk / Equipment.
Fast Turnaround Time.
One-Stop shop for Clients.
Concept of Islamic Financial Supermarket.
Value Added Services.
Law of Large Numbers.
Lower Contribution Rates.
Attraction for Depositors.
Synergy.
ReTakaful
Currently few ReTakaful companies worldwide offering a
relatively small capacity:
Sudan (1979) National Reinsurance.
Sudan (1983) Sheikhan Takaful Company.
Bahamas (1983) Saudi Islamic Takaful and ReTakaful
Company.
Bahrain/Saudi Arabia (1985) Islamic Insurance and
Reinsurance Company.
Tunisia (1985) B.E.S.T. Re
Malaysia (1997) ASEAN ReTakaful International.
Dubai (2005) TakafulRe by ARIG.
Lloyds of London to have a ReTakaful Syndicate in 2007.
SwissRe has formed a separate ReTakaful Pool
MunichRe to form a separate ReTakaful Pool
Provision in Takaful Rules – 2005.
T I M E L I N E – T A K A F U L I N P A K I S T A N
Objectives Report by the Takaful
Resolution Council Rules
1949 1992 2005
1983 2000 2006
Review by Council Insurance TAKAFUL
of Islamic Ideology Ordinance PAKISTAN
LIMITED
Takaful Prospects in Pakistan
97% Muslim population.
Demand for insurance increasing with increase in
per capita income.
Personal lines insurance business (leasing, health,
Medicare) growing at a higher rate than other
conventional classes.
Islamic banking on sound footing with support of
the Govt.
TAKAFUL - TARGET MARKET
People who do not insure due to
religious reasons.
People who insure and are insensitive to
religious reasons.
People who currently do not insure at all.
Challenges to Takaful
Skepticism.
Lack of uniformity in Shariah decisions.
‘Windows’ issue.
Regulatory issues.
Capacity constraints due to inadequate
ReTakaful.
Limited Investment avenues.
H.R. issues.
Introduction to
TAKAFUL PAKISTAN
LIMITED
TAKAFUL PAKISTAN LIMITED
Takaful Pakistan is a joint venture of prestigious local
& foreign institutions, including:
House Building Finance Corporation.
Emirates Global Islamic Bank.
Arif Habib Securities.
Sitara Chemicals.
Emirates Investment Group (Sharjah).
Al-Buhaira National Insurance Co. (U.A.E.)
Large initial paid-up Capital.
TAKAFUL PAKISTAN LIMITED … (Cont’d.)
Managed by dedicated professionals, committed to the
cause.
ReTakaful arrangements with a consortium of
internationally reputed ReTakaful operators.
Shariah Board comprises of eminent scholars.
BancaTakaful and MicroTakaful products.
We intend to be the trend-setter for excellent Clients’
Servicing, Operational bench marks and prudent
Underwriting practices.
Conclusion
Takaful defined.
Comparison with conventional insurance.
Takaful Models
Takaful Types
BancaTakaful
ReTakaful
Takaful Pakistan Limited
Thank you for your attention
